RBNZ Preview - September 2020: Eyes On The Nuances

MNI Point of View:

• There seems to be little scope for the RBNZ to do much at the upcoming Monetary Policy Review (MPR). The Monetary Policy Committee (MPC) has been sufficiently dovish to be able to allow itself to stand pat. Improving market conditions and the RBNZ's usual reluctance to add stimulus at its interim (non-MPS) meetings should result in a relatively uneventful meeting. If anything, the MPC may tweak its forward guidance but any major moves would go with a price tag in terms of longer-term credibility.
• Policymakers will probably use this opportunity to stand pat, given that other circumstances tie their hands. New Zealand's Treasury announced that it will trim its bond issuance plans, which reduces the effectiveness of further increasing the LSAP size. Analysts (see sell-side previews below) have pointed to calculations suggesting that given New Zealand's issuance plans the programme is already at or near its maximum size. Meanwhile, bringing the OCR into negative territory remains untenable before the year-end deadline set for lenders to prepare operationally. A more modest rate cut is a theoretical possibility, but just that – there seems to be little to warrant such a move.
• New Zealand has now officially entered a technical recession and it is the deepest one on record. But the quarterly contraction was not as bad as anticipated by New Zealand Treasury's Pre-Election Fiscal and Economic Update or the RBNZ's already upgraded forecasts from the August MPS. Higher-frequency indicators have generally supported the message that things are better than had been thought. The re-emergence of coronavirus in New Zealand was worrying but with the benefit of hindsight, it was more its timing than its occurrence that took us by surprise. Now that alert levels in Auckland and the rest of the nation have been lowered, there are reasons to be, in relative terms, cautiously optimistic.
• The main focus will fall on forward guidance. The RBNZ has been steadfast in repeating the refrain about its commitment to keep the OCR unchanged for 12 months, since first uttering these words after an emergency meeting in March. If the MPC keeps its word, the first scheduled occasion with an OCR reduction on the cards would be an MPR in April, which follows a February MPS. There is a dovish risk of the RBNZ softening its forward guidance to open the doors for a rate cut in February, but undermining own messaging would come at a cost and the circumstances give few reasons to do so. Commenting on the above-forecast GDP figures last week, New Zealand's Treasurer Grant Robertson reminded that the central bank pledged to keep the OCR on hold through March 2021, adding that the RBNZ will "bear [strong data and healthy condition of domestic financial markets] in mind when they come to think about their decisions post March next year".
• With no material risk of any major policy move, forward guidance and rhetorical nuances will steal the limelight this time. Better than expected economic data, a relatively dovish August MPS and underlying market conditions support the view that the RBNZ will leave policy levers untouched for now. Its commentary on the exchange rate will be scrutinised, as a strong NZD remains a source of worry despite aforementioned comments from Governor Orr. It is worth remembering that policymakers have been tasked with helping guide the nation through the worst economic crisis in living memory, which is far from being over. The MPC can be expected to reiterate that it is ready to add stimulus if needed, including via unconventional monetary policy tools in a familiar order of preference.

MNI RBNZ Preview September 2020.pdf